Stephen Bainbridge's Journal of Law, Religion, Politics, and Culture

11/29/2011

Senator Kirsten Gillibrand's Bizarre and Toothless Version of the STOCK Act

Here at PB.com, we've been covering the debate in Washington over the STOCK Act, which would resolve the debate over whether insider trading by members of Congress is unlawful by clearly making most such trading unlawful. (See the archive for earlier posts.)

The most common version of the bill has some serious flaws, which I detailed in this post. But I have now seen Senator Senator Kirsten Gillibrand's version of the STOCK Act and am well and truly gobsmacked at how bad it is.

Here's the key operative language from the version introduced by Senator Scott Brown (S. 1871):

Not later than 270 days after the date of enactment of this Act, the Commission shall, by rule, prohibit any person from buying or selling the securities or security-based swaps of any issuer while such person is in possession of material nonpublic information relating to any pending or prospective legislative action relating to such issuer, if--

(A) such information was obtained by reason of such person being a Member or employee of Congress; or

(B) such information was obtained from a Member or employee of Congress, and such person knows that the information was so obtained.

The same language appears in the House version,

Here's the operative language from Senator Gillibrand's bill:

Not later than 270 days after the date of enactment of this Act, the Commission shall, by rule, prohibit any person from buying or selling the securities or security-based swaps of any issuer while such person is in possession of material nonpublic information relating to any pending or prospective legislative action relating to such issuer, if--

(A)(i) such information was obtained by reason of such person being a Member or employee of Congress; or

(ii) such information was obtained from a Member or employee of Congress, and such person knows that the information was so obtained;

(B) the person acted with the intent to assist another person, directly or indirectly, to use the information to enter into, or offer to buy or sell the securities of such publicly traded company based on such information.

This is just nuts. First, notice the lack of a conjunction between subsections (A) and (B). Presumably, that's just a typographical error. Essentially identical sections appear elsewhere in the Act to deal with derivatives and those sections include the conjunction "and" between their versions of subsections (A) and (B).

Second, and vastly more important, because the conjunction "and" is to be assumed, note that Congress member Abel will be prohibied "from buying or selling the securities or security-based swaps of any issuer while [Congress member Abel] is in possession of material nonpublic information relating to any pending or prospective legislative action relating to such issuer, if" AND ONLY IF [Congress member Abel] "acted with the intent to assist another person, directly or indirectly, to use the information to enter into, or offer to buy or sell the securities of such publicly traded company based on such information."

Read literally, the bill prohibits insider trading by members of Congress only if the member not only personally trades on the basis of such information but also tips the information to "another person" with intent to aid that other person to use the information to trade for personal profit.

Suppose, for example, a Member of Congress learns nonpublic information at a confidential closed door hearing. The Member uses that information to trade for personal profit. But he never assists "another person, directly or indirectly, to use the information to enter into, or offer to buy or sell the securities of such publicly traded company based on such information." Read literally, because it requires "the person" who is prohibited from insider trading to "assist another person," Gillabrand's version of the STOCK Act would not prohibit such trading.

Worse yet, because Gillibrand's version of the STOCK Act requires "the person" who is prohibited from insider trading to "assist another person," it would not apply in the converse situation in which somebody gives a member of Congress information with intent to assist the member to trade!

One is constrained to ask, in terms rarely deployed on this blog, what the fuck?

What is Gillibrand thinking? Is it just sloppy draftsmanship or an intentional effort to gut the Act of what few teeth it actually possesses? Personally, I suspect that Congress is just hoping that this issue will die down before they have to act, so I'm inclined to be cynical and assume that this language was intended to eviscerate the Act.

Both the House and Senate are holding hearings in the next week or so. Call your Congressman.

Update: Gillibrand is now claiming that the wording was a "technical" error that will be fixed. Plausible, I guess, given the bill's sloppiness with conjunctions. Maybe they meant "or" instead of "and."

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Senator Kirsten Gillibrand's Bizarre and Toothless Version of the STOCK Act

Here at PB.com, we've been covering the debate in Washington over the STOCK Act, which would resolve the debate over whether insider trading by members of Congress is unlawful by clearly making most such trading unlawful. (See the archive for earlier posts.)

The most common version of the bill has some serious flaws, which I detailed in this post. But I have now seen Senator Senator Kirsten Gillibrand's version of the STOCK Act and am well and truly gobsmacked at how bad it is.

Here's the key operative language from the version introduced by Senator Scott Brown (S. 1871):

Not later than 270 days after the date of enactment of this Act, the Commission shall, by rule, prohibit any person from buying or selling the securities or security-based swaps of any issuer while such person is in possession of material nonpublic information relating to any pending or prospective legislative action relating to such issuer, if--

(A) such information was obtained by reason of such person being a Member or employee of Congress; or

(B) such information was obtained from a Member or employee of Congress, and such person knows that the information was so obtained.

The same language appears in the House version,

Here's the operative language from Senator Gillibrand's bill:

Not later than 270 days after the date of enactment of this Act, the Commission shall, by rule, prohibit any person from buying or selling the securities or security-based swaps of any issuer while such person is in possession of material nonpublic information relating to any pending or prospective legislative action relating to such issuer, if--

(A)(i) such information was obtained by reason of such person being a Member or employee of Congress; or

(ii) such information was obtained from a Member or employee of Congress, and such person knows that the information was so obtained;

(B) the person acted with the intent to assist another person, directly or indirectly, to use the information to enter into, or offer to buy or sell the securities of such publicly traded company based on such information.

This is just nuts. First, notice the lack of a conjunction between subsections (A) and (B). Presumably, that's just a typographical error. Essentially identical sections appear elsewhere in the Act to deal with derivatives and those sections include the conjunction "and" between their versions of subsections (A) and (B).

Second, and vastly more important, because the conjunction "and" is to be assumed, note that Congress member Abel will be prohibied "from buying or selling the securities or security-based swaps of any issuer while [Congress member Abel] is in possession of material nonpublic information relating to any pending or prospective legislative action relating to such issuer, if" AND ONLY IF [Congress member Abel] "acted with the intent to assist another person, directly or indirectly, to use the information to enter into, or offer to buy or sell the securities of such publicly traded company based on such information."

Read literally, the bill prohibits insider trading by members of Congress only if the member not only personally trades on the basis of such information but also tips the information to "another person" with intent to aid that other person to use the information to trade for personal profit.

Suppose, for example, a Member of Congress learns nonpublic information at a confidential closed door hearing. The Member uses that information to trade for personal profit. But he never assists "another person, directly or indirectly, to use the information to enter into, or offer to buy or sell the securities of such publicly traded company based on such information." Read literally, because it requires "the person" who is prohibited from insider trading to "assist another person," Gillabrand's version of the STOCK Act would not prohibit such trading.

Worse yet, because Gillibrand's version of the STOCK Act requires "the person" who is prohibited from insider trading to "assist another person," it would not apply in the converse situation in which somebody gives a member of Congress information with intent to assist the member to trade!

One is constrained to ask, in terms rarely deployed on this blog, what the fuck?

What is Gillibrand thinking? Is it just sloppy draftsmanship or an intentional effort to gut the Act of what few teeth it actually possesses? Personally, I suspect that Congress is just hoping that this issue will die down before they have to act, so I'm inclined to be cynical and assume that this language was intended to eviscerate the Act.

Both the House and Senate are holding hearings in the next week or so. Call your Congressman.

Update: Gillibrand is now claiming that the wording was a "technical" error that will be fixed. Plausible, I guess, given the bill's sloppiness with conjunctions. Maybe they meant "or" instead of "and."